Sunday, May 29, 2011

It's been a while since I read a self help motivational book. Steve Chandler's book was picked more or less at random and for the principle reason that I wanted some ideas to keep myself motivated once I transit into retirement and no longer have anyone imposing deadlines on me, no one paying me to get off my butt and get things done and no longer have the sense of professional responsibility to fall back on when all else fails. I've a long list of things I want to do once I leave the work force for good and don't want to wake up four or five years into retirement and find that my only achievement has been to gain weight and leave a permanent indentation in the sofa.

Chandler's book might have been designed just for me - 100 different techniques (actually 101) for motivating yourself to get things done, to find inspiration, to lift you mood, deal with pessimism and other similar problems.

I particularly liked the sheer diversity of the techniques offered. Approaches ranging from "welcoming the unexpected" to "get on your deathbed" all struck a chord with me. I can see this book staying on my book shelf (Kindle) for some time as a pick me up for times when I'm struggling to get going.

This one joins Richard Wiseman's 59 Seconds as one of the few self help books that I can see myself revisiting in the future.

Friday, May 27, 2011

In the space of 24 hours two reasonably prominent PRC companies listed in Hong Kong have been subject to allegations involving accounting irregularities:

1. Chaoda Modern Agriculture (HK:682) was subject to an allegation by a tabloid newspaper that it had overstated the size of its land bank (among other issues). The company's general denial carried no weight with investors and the share price dropped by about 25% during the course of yesterday's trading. This is from a company that was already deeply unpopular with investors due to various actual and proposed capital raisings which had diluted and damaged existing shareholders' interests;

2. Real Gold Mining (HK: 246) has been subject to claims reported in the SCMP that it filed different sets of accounts with the Hong Kong Stock Exchange and the regulatory authorities in the PRC. For 2009 (the most recent year for which both sets of reports are available) the revenue reported to the HKEX was in excess of 0ne billion RMB while the company's PRC operating companies collectively reported sales of only RMB3.45 million. The reports filed in the PRC have now gone "missing". These allegations have followed a number of top level management changes in 2009. As at the time of writing, the shares are suspended from trading.

In both cases, the companies have denied the allegations. In both cases, the denials are general rather than specific, there has been no confirmation that a more detailed explanation will be forthcoming and no proposals to verify the companies positions (unlike in the case of China Gas (HK:384) which dealt with its own much less serious issues in a robust and open manner).

While Real Gold was not a company that I ever considered investing in (I am not a believer in gold), I did take a long hard look at Chaoda Modern Agriculture but (fortunately) decided not to invest. If I did hold shares in either company, at this point I would be taking my losses and heading for the exits (where possible) - if the allegations are true then the problems are very serious.

The two cases illustrate some of the risks of investing in equities. These sorts of problems can occur in any market (and even the most heavily regulated markets have had their share), but are not going to deter me from maintaining my bias towards risk assets. Almost all companies are run honestly and there are few other investments which offer the potential returns of equities over the longer term. The "safe" alternatives simply represent a different types of risk. IMHO, being aware of and managing risk is a better strategy than avoiding it altogether.

Monday, May 23, 2011

Manufacturers in the PRC are complaining about power shortages. Reports of electricity being cut for 1-3 days a week in some areas are common. Electricity shortages are adding to the problems of rising raw material costs, rising labour costs and currency appreciation which businesses in China now face. To make matters worse, the peak season for electricity demand is over the summer months and a number of power stations will experience disruptions to operations due to scheduled maintenance work. In short, the situation is expected to worsen.

The cause of the problem is fairly basic: a shortage of coal to use as fuel in China's power generators. Given the comparative global abundance of coal (of most grades), at first glance this is surprising. However, the reasons for a shortage of coal are also not hard to identify: increased demand, price controls and a much needed government plan to "clean up" the appalling safety and environmental standards of China's coal mining industry. Of these, the price controls are the easiest to deal with - simply remove the controls.

While one would also think that reduced electricity consumption would be a good thing for the environment, its not. Many of the manufacturers affected by disruption to their power supply will fall back on diesel powered generators which produce more pollution than coal generators.

From an investment perspective, the case for investing in coal companies looks quite good (I already hold a large position in Yangzhou Coal (HK:1171)). China's leading coal mining companies typically have very solid balance sheets and sell at reasonable forward looking valuation multiples (if you believe the forecasts). The greater risk to the sector is the possibility of further price controls being adopted. Logically, additional price controls would lead to further shortages, but since when has either logic or historical experience had much impact on government policy?

The coal shortage also makes the case for investing in China's nuclear programme and possibly some clean tech companies (about which I know relatively little). I also took a look at IPP sector but struggled with both the highly leveraged balance sheets and the PRC government's efforts to tame inflation through price controls.

Wednesday, May 04, 2011

Housing is a subject that often produces strong polarising opinions, often based on whether the person expressing the opinion is an owner or a renter (unless you live with your parents or on the street you are one or the other) and whether your local property market has been rising or falling. Recency bias, personal perspective and local conditions all affect people's views on housing - posting an article on "rent v buy" on a forum will usually produce a predictable variety of responses.

Two stories about housing markets around the world caught my attention this week:

1. US household formation to increase: the decline of the US housing market has been a significant contributor to the recent financial crisis. This article from Bloomberg makes the case that the financial crisis has depressed the usual rate of household formation (e.g. adult children living with their parents for longer, couples deferring divorce etc). This represents a temporary state of affairs and, as the recovery continues, the rate of household formation will improve. In effect there is an element of shadow demand out there which will eventually become real demand. I find the reasoning quite persuasive. I would not be surprised if the recovery was sooner and quicker than a lot of people think - all the attention has been on the negatives (over supply, high unemployment etc) and the positives (lower prices, cheap loans, improving employment) have gotten a lot less space in either the media or the blogosphere;

2. Australian house prices decline: Another Bloomberg article covered the decline in Australian residential prices in the first quarter of this year. In stark contrast to the American market, the Australian housing market has been strong to the point where it is one of the least affordable markets in the world. Relatively low interest rates, rising population, low unemployment and an economy fuelled by a boom in exports of natural resources have all contributed to the rise. The recent decline (which is not large - 1.7% across eight major cities) has been attributed to higher interest rates and, in some parts of the country, increased supply.

If property was as easily tradable as equities, there would be quite a good case to exit the Australian market and buy into the US market. The comparative strength of the AUD against the USD would make the investment case even stronger. Leaving aside the fact that I do not own any property in Australia, the reality is that property is not as easily tradable as equities (REITs aside) and owning property in distant and unfamiliar markets can be a painful and daunting experience.

Is there an easy way for a non-resident to gain exposure to a recovering US housing market?

Tuesday, May 03, 2011

Every five years the Hong Kong government reviews and adjusts the basket of goods and services which comprise the Consumer Price Index (CPI).

As with previous adjustments, the result of this year's review was to reduce the leading measure of inflation for the year ended March 2011 from 4.57% to 4.38% - a fall of 0.19%.

While it is reasonable that the CPI composition be adjusted from time to time to reflect changes in what we, as consumers, collectively spend our money on, the fact that these reviews just about always result in downward revisions to inflation data casts doubts over the validity of the adjustments.

It's also worth noting that even at a reduced 4.38% pa, inflation is still high enough to do a lot of damage to the real spending power of consumers and the real wealth of investors. Inflation remains one of the biggest threats to a financially successful retirement.

The result was surprising because of the recent sell of in the equity markets in which I invest (mostly emerging markets). However, the losses on equities were relatively modest and were more than compensated for by a combination of gains on commodities (especially silver), FX gains (AUD/NZD), the rental returns on my properties and modest savings.

Here are the details:

1. my Hong Kong equity portfolio declined. This month I made investments in China VTM(HK:893) and Xtep (HK:1368). A very small loss was realised on a position in CMB warrants;

4. all of my properties are occupied, the tenants are paying on time. One overseas property has reached the point where a number of long term maintenance issues need to be dealt with. Fortunately the tenant (who has been there for over 7 years) is happy to stay while the work is being done. I will have a large repair bill at some stage on a Hong Kong property suffering from a persistent leak;

5. currency movements were very positive, as both the AUD and NZD appreciated against the HKD/USD. The currency movement alone was more significant than the declines in the equity portfolio;

6. my position in bonds remains small. There were no purchases this month;

7. there were no outstanding derivatives;

8. savings were modest with low income and moderate expenses. The former is inherent in the nature of my remuneration package. We took a family holiday over Easter. As travel is one of my accruals, the holiday cost had no one off impact on my savings rate;

My cash position was remained static due to equity purchases. I continue to sit at 19 months of expenses in cash or equivalents (compared to 26 months at the end of February).

For the month, my net worth increased 1.54%. The year to date increase is 11.17%.

My target retirement window remains sometime between early 2012 and early 2013. While the possibility of a one year extension exists, it will take some adverse market conditions or other unexpected event to require that. Every passing month brings me closer to my retirement goal - it's possible that I may be handing in my notice less than a year from today.